Category: Central Banks

We’re obviously at the end of an economic era. Clearly there are at least one, maybe several, fundamental, structural flaws deep in the heart of our economic system. Any financial news source from any day of the week will give you evidence of economic stagnation and instability. And any Trumpeteer, Bernie Bro or Brexiter will tell you that all is not well among the ordinary people of the heartland. Clearly something is badly wrong with the actual, real economy.

Very serious people who think about very important things that affect us all. Or is it bollox?

Meanwhile, in the dusty halls of academia, of governments, and of banks, think tanks and other established and often ancient institutions, a bunch of people, mostly men, who like to think of themselves as smart are charged with fixing whatever it is that has gone wrong. They’re economists, and their ideas, perspective and advice not only strongly influences what governments and central bankers do, but influences how governments and central bankers think about what they do. Economists even frame the choices within which governments and central bankers operate. In a way, their theories help create real, actual economic reality for us all.

Money is important, governments have power, and economists influence what governments do with that power. Economists are therefore very, very important people doing very, very serious and important things that affect the real lives of hundreds of millions of people. This is serious stuff. Just ask them – they’ll tell you.

They don’t look very practical.

The thing to know about economists is that, like the magicians in the world of Jonathan Strange and Mr Norrell, there are two kinds of them: Practical Economists and Theoretical Economists. Practical economists are the ones out to change something. They work for governments, banks, central banks, lobby groups, etc. They want to fiddle with the workings of the economic machine to make it better – for somebody, if not for everybody.

Theoretical economists, on the other hand, are above all that. They think of themselves as scientists and see their purpose as a search for Truth. The practical economists, occupied with many other matters, depend on the theoretical economists for their theories. In other words, theoretical economists (specifically, theoretical macroeconomists) create the theory used by practical economists to strongly influence power. Theoretical economists may be relatively unknown, they may be boring, they may be incomprehensible, but they are very, very, very important people.

This is unfortunate, because there are two serious problems facing the community of theoretical macroeconomists these days:

The first problem facing theoretical macroeconomists is that reality is diverging from theory. More specifically, reality is diverging from their theory. In theory, theory and practice are the same, but in practice they’re not. In macroeconomic theory, X should be happening, or Y should be happening. Meanwhile, in practice, financial instability, weak growth, austerity, inequality, income insecurity and many other economic woes blight the lives of billions. In other words, whatever it is that macroeconomists are doing, or think they’re doing, it’s clearly not working.

That was a surprise! Oh well, these things happen.

And it’s not just that theoretical macroeconomists can’t fix the economy – they can’t even predict what’s going to happen! The 2008 financial calamity came out of the blue for most of them. Can you imagine the credibility of weather forecasting if the biggest storm in 75 years hit with almost no warning whatsoever? When an economic theory can’t even predict that, and seems useless at improving the situation, then what’s the point of it? It’s hard not to call bullshit.

Which brings me to the second problem facing theoretical macroeconomists today – the growing rebellion within their ranks. Essentially, theoretical macroeconomists are dividing into two camps, with more and more of them publicly doubting the orthodoxy. Faced with fact after fact that does not conform to their theories, more and more theoretical economists are, to their great credit, doubting those theories. Simply put, the ideas of theoretical macroeconomists affect the lives of millions, and there is currently an earthquake happening in their conceptual field.

The Chief Economist of the World Bank says that much of macroeconomics has become a religion, whose “pseudoscience” is infecting all social disciplines (that’s the Chief Economist of the World Bank). In a NYT article titled ‘How Did Economists Get It So Wrong?’ Paul Krugman questions the very assumptions that underlie conventional macroeconomic theory. Willem Buiter, the Chief Economist of Citigroup, calls most modern macroeconomics “useless“. Former Bank of England economist Charles Goodhart argues that economists need to start paying attention to money again. Olivier Blanchard, former Chief Economist of the IMF, calls the dominant strand of macroeconomic thinking “insular” and “imperialistic”. And on and on it goes, with the recurring theme that macroeconomic theory has become orthodoxy, not science.

In other words, the macroeconomic theories behind the decisions of finance ministers, central bankers and other powerful people and institutions may well be bollox. Looking at financial instability, stagnant demand, tepid growth, austerity, inequality, income insecurity and all the other endemic economic problems of our age, it’s hard not to think that this might explain a lot.

You might think that the debate between orthodox theoretical economists and their colleagues who call bullshit would be dry, boring and filled with talk of phlogistons, cycle theory, DSGE models and other impenetrable concepts, but it’s not always that way. With a kind of morbid fascination at the spectacle of concepts behind many a distinguished career crumbling in the cold, hard light of factual reality, huge entertainment can be had from following the twitter feed of Paul Romer, the Chief Economist of the World Bank, as he appeals to his more orthodox colleagues to face facts. It would almost be funny if weren’t for all the real human pain behind it.

If we accept the rapidly growing body of evidence and authority suggesting that many of the core concepts of conventional macroeconomics are bollox, and that economists don’t really know what they’re doing, then the important question becomes ‘What next?’ As conventional macroeconomic theory crumbles in the face of facts, what will replace it?

One of the primary contenders is Modern Monetary Theory, which focuses on money itself (something which, believe it or not, conventional macroeconomic theory doesn’t do). Another possibility is that macroeconomics will learn from complexity and systems theory, and that its models (and, hopefully, their predictive ability) will become more like those used in meteorology and climate science. Anti-economist Steve Keen is working in this direction, influenced by the Financial Instability Hypothesis (FIH) of Hyman Minsky, whatever that is.

But wherever macroeconomics is going, it’s clear that the old order is collapsing. The theoretical orthodoxy that has guided the highest level of economic management for many decades is crumbling. Either economics is an objective science or it’s not. And if economics is not an objective science, then we quickly need an economics that is. Countless livelihoods and lives will be deeply affected by the revolution we are witnessing in theoretical macroeconomics. It may be dry, it may be boring, it may be theoretical, and it may seem incomprehensible.

Yesterday, as happens every six weeks, the Governing Council of the European Central Bank met in Frankfurt to discuss monetary policy. In attendance, as always, were the six members of the ECB’s executive board and the nineteen governors of the eurozone’s national central banks. Together these 23 men and 2 women discussed economic conditions, interest rates and their €1,225,566,000,000 (and counting) quantative easing program.

The decisions made at these meetings are vast, and have very real effects on the financial lives of the 340 million people who live in the Eurozone. The results of ECB meetings dramatically influence markets, the economy and the amount that governments have to spend on public services. In other words, those 25 people who met in Frankfurt yesterday are, for all practical purposes, the gods of money for the 340 million of us who live in the Eurozone.

As usual, Mario Draghi, president of the group, held a press conference right after the Frankfurt meeting. Again, as usual, that press conference was published on YouTube as soon as it had finished. Four hours later that YouTube video had attracted a total of 35 views. A full 24 hours later and there have been 460 views. As I write this there are 650 views.

Monetary policy for 340 million people. Not exactly riveting YouTube viewing – but only 650 hits?

However I know for a fact that at least a dozen of those views were mine, and I imagine there are others who also account for multiple views. And since the press conference is not exactly riveting viewing, I expect that many viewers only watched a little of it before clicking on elsewhere. Apart from the 50-odd people who were in the room, it’s safe to say that only a few hundred other people have actually seen the whole thing.

The last ECB press conference, on August 2nd, has had only 1,308 views in the 6 weeks it’s been on Youtube. The July 21st press conference has attracted 4,130 hits, several of them from me. The one before that only got 3,962 views since it was published nearly three months ago. Again, several of those hits were mine.

Now, money is very important to me, and I’m sure it’s important to you too. Money is especially important for poor people, who spend much of their time thinking about it, but many rich people also spend a lot of their time thinking about money. Many of us spend much of our lives working for money. It’s how we eat. It’s how we put a roof over our heads. It buys our clothes. It allows us to travel. It dictates what our democratic governments can and can’t do. Reach into your pocket or purse or wallet and take out some money and look at it. It’s important, right!

So despite money being, lets face it, the most practically important thing in the day-to-day lives of us 340 million people; and despite the fact that the financial sector accounts for around 20% of GDP; and despite the vast size and reach of the business and financial press and media, and the many thousands of people writing and communicating in this area; and despite the fact that highlights from Mario Draghi’s press conference were publicised in news broadcasts across the continent and around the world (it was even mentioned on my local radio station) – despite all that, only a few hundred people out of 340 million were interested enough to see for themselves what the Eurozone gods of money had to say.

The ECB’s website statistics tell a similar story. Their site gets around 216,000 visits a month, or about 50,000 a week. However it’s ‘bounce rate’ (i.e. the number of visits in which the viewer looks at only one page on the site, discovers they’re not interested, and moves on) is a phenomonal 65%. That means that there are only around 17,500 real visits a week or about 2,500 per day.

The ECB website: A dense, boring, inpenetrable morass of euphemisms for ‘printing money’.

Now, 2,500 visits a day might sound like a lot, but it’s not – especially when you consider the importance of the institution and the fact that it controls the money supply of 340 million people. And, since many of those visits are multiple visits from the same people, and some are search engine bots and other non-human visitors, we’re probably talking about real traffic of significantly less than 2,000 actual people each day. And even among those 2,000 people the average visitor looks at only 2 pages and spends less than 2 min on the site. Almost none of this traffic (only 1.27% or about 200 real visits per week) comes from social media. My Twitter profile sometimes gets more than that.

The inescapable fact is that, despite the importance of the European Central Bank to the real financial lives of 340 million people, almost nobody, including most financial journalists, is interested in the details, minutiae and specifics of what they actually do. I suspect the same is true for the activities of the Federal Reserve, the Bank of England, the Bank of Japan and other central banks.

This is a pity, because there’s some interesting stuff on the ECB’s wesite. For example, did you know that the ECB now owns €1,225,566,000,000 (i.e. €1.2 TRILLION) worth of assets (mostly government bonds) purchased with printed money through its Asset Purchase (i.e. QE) Program? Or that it has lent $20 billion of printed money to corporations since June and is printing and lending €7 billion more each month? Did you know that the ECB buys some of this corporate debt directly from the corporations concerned, even though it’s not allowed to deal directly with governments? And did you know that the ECB even promotes the availability of its printed money to corporations, advertising that “Market participants involved in private placements can contact the relevant national central bank”.

Did you know that the ECB lends out the corporate assets it has bought with printed money so that borrowers of those assets can sell them short and make a profit if the price falls? The ECB has already bought and lent out securities from SAP, Siemens, Allianz, E.ON, BMW, Volkswagen, BASF, Bayer, Bosch, Merck and many other corporations since it started lending out the securities it owns six weeks ago.

And did you know that lists of all purchases of assets with printed money (minus the amounts) are available on the websites of the six national central banks buying on behalf of the ECB, and that those lists are updated every monday? Did you know that the ECB does buy securities from corporations classified as “public undertakings” (i.e. owned or controlled by government), but won’t disclose any details of exactly what “public undertakings” it is buying from? And there’s lots more of interesting, juicy information that could easily be spun into accessible and interesting media stories.

You can borrow the ECB’s freshly printed money to buy Monsanto, but not to buy groceries.

For example, the ECB says that it is lending €7 billion of freshly printed money each month to big corporations in order to “further strengthen the pass-through of the Eurosystem’s asset purchases to financing conditions of the real economy”. One of the corporations it lends to is Bayer, which is in the process of buying Monsanto for $65 billion, so the ECB is essentially printing money to help Bayer buy Monsanto. Surely that would be interesting to many people, if only they knew?

As one of the literally one-in-a-million Eurozone citizens who actually watched yesterday’s ECB press conference, and as one of the very few people who have waded through the ECB’s website, it seems clear that more people, including more financial journalists, need to pay a lot more attention.